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Jackson Financial Inc. (JXN)

Q3 2024 Earnings Call· Thu, Nov 7, 2024

$115.41

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Transcript

Operator

Operator

Hello, and welcome to the Jackson Financial Inc. 3Q '24 Earnings Call. My name is Harry, and I'll be your operator today. [Operator Instructions]. I would now like to hand the conference over to Liz Werner, Jackson Head of Investor Relations. Thank you. Please go ahead.

Elizabeth Werner

Analyst

Good morning, everyone, and welcome to Jackson's Third Quarter 2024 Earnings Call. Today's remarks may contain forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events and are based upon management's current expectations. Jackson's filings with the SEC provide details on important factors that may cause actual results or events to differ materially. Except as required by law, Jackson is under no obligation to update any forward-looking statements if circumstances or management's estimates or opinions should change. Today's remarks also refer to certain non-GAAP financial measures. The reconciliation of those measures to the most comparable U.S. GAAP figures is included in our earnings release, financial supplement and earnings presentation, all of which are available on the Investor Relations page of our website at investors.jackson.com. Joining us today are our CEO, Laura Prieskorn, our CFO, Don Cummings; the President of Jackson National Life Distributors, Scott Romine; and our Chief Actuary, Steve Binioris, and the President and Chief Investment Officer of PPM, Craig Smith. At this time, I'll turn the call over to our CEO, Laura Prieskorn.

Laura Prieskorn

Analyst

Good morning, everyone. Today, we will discuss Jackson's third quarter results and progress through the first 9 months of the year. Our results reflect diversified and growing annuity sales, recent product and distribution initiatives and sustainable capital generation with 3 operating quarters completed with our captive Brook Re, we're realizing the benefits of greater capital stability, which are evident in our third quarter results. Beginning with Slide 3, net income was a loss for the third quarter and positive over the full 9 months. Importantly, we've experienced less volatility than prior periods with the formation of Brooke Re and achieved greater alignment between adjusted operating earnings, GAAP net income and statutory capital generation. Adjusted operating earnings were up in the third quarter compared to the same period last year and are also up comparatively on a year-to-date basis. Increased fee income, combined with greater investment spread income, once again supported strong earnings growth in our retail annuity segment. Favorable equity markets and increasing sales resulted in a 9% growth in assets under management through the first 9 months to more than $250 billion. The combination of product innovation, risk management, best-in-class service, scale and strong distribution partnerships continue to provide a solid foundation for sustainable growth. Total retail annuity sales exceeded $5 billion for the third quarter, up 59% from the third quarter of 2023 and up 25% from the second quarter of 2024, marking our highest and most diversified quarter of sales since becoming an independent company in September of 2021. Our RILA's segment hit record sales with more than $1.6 billion in the third quarter of 2024, bringing us to more than $4 billion over the first 9 months of the year. Jackson Market Link Pro continues to grow as a RILA product of choice. And after 3…

Don Cummings

Analyst

Thank you, Laura. I'll begin on Slide 6 with our third quarter 2024 consolidated financial results. Adjusted operating earnings of $350 million were up 11% over the third quarter of last year. This significant growth in earnings was primarily due to higher fee income from growth in our variable annuity assets under management and higher earnings on spread products. We had a challenging comparable on a sequential basis with the nonrecurring 0payout annuity reserve release, benefiting second quarter earnings by $24 million after tax or $0.31 per share and the impact of higher market-related operating expenses in the third quarter. These market-related costs were particularly impactful in the third quarter of this year with Jackson's common share price up nearly 24% and the S&P 500 up over 5%, driving an increase in general and administrative expenses. Spread earnings benefited from gains in net investment income, primarily driven by the growth of our RILA block as well as higher portfolio yields on our bond portfolio. The investment portfolio supporting our spread products has continued to perform well. The appendix of our earnings presentation provides information on our high-quality, diversified investment portfolio. This information includes insights into our commercial office loan portfolio, which is less than 2% of the investment portfolio. It also includes our exposure to below investment-grade securities which represents only 1% of the portfolio on a statutory basis. Before turning to notable items in the quarter, I want to highlight the growth in book value since year-end. Our adjusted book value attributable to common shareholders ended the third quarter $11.2 billion or $149.29 per diluted share, an increase of approximately 10% from year-end driven by our strong operating performance and common share repurchase activity. Adjusted operating return on equity was 13% for the 9 months of this year, up…

Laura Prieskorn

Analyst

Thank you, Don. Our third quarter results and cumulative progress through the first 9 months demonstrate Jackson's business strength, market leadership and sustainable capital generation. As we look forward to completing another year as an independent company, our focus on execution and capital discipline is strong. We remain committed to profitable growth serving all stakeholders and enhancing shareholder value over the long term, including our commitment to capital return. As always, I'd like to acknowledge our talented Jackson team. Their dedication to our purpose of helping Americans achieve financial freedom for life is our greatest strength. The opportunity to work alongside our associates is ever rewarding as we continue to deliver against our strategic and operational goals while supporting our clients, our distribution partners, our communities and each other. At this time, I'll turn it over to the operator for questions.

Operator

Operator

[Operator Instructions] Our first question today will be from the line of Alex Scott with Barclays.

Alex Scott

Analyst

Hi, good morning. First question I wanted to ask is just on the strong statutory earnings this quarter, and I think there was part of it that was nonrecurring, and you all have been pretty clear about the expectation there. But I wanted to understand like how much of an offset do you exact from growing the business, just acknowledging the strength in RILA sales and so forth? Like how much sort of net uplift RBC that is more readily available to send to the holding company do you expect to have annually?

Don Cummings

Analyst

Alex, it's Don. Yes, I'll take your question. So in terms of capital usage for new business, we feel really comfortable with our current capital mix. We do believe that's relatively capital efficient. And that could change obviously as we see opportunities going forward to diversify our mix but we're pretty comfortable. And I think one example of the flexibility that we have there is with the increased level of fixed annuity sales that we saw in the quarter, we were able to do that. And there obviously was a little bit of a capital impact related to that on the required side, but that was kind of largely offset with some normal portfolio activity. In terms of RILA's strength, I think there's kind of a minimal impact coming through TAC in the current quarter. But as we bring on more assets, there is -- obviously, there's a capital they have to put up to support those growing level of assets. But in general, we're pretty comfortable with our product mix and feel that it's quite manageable going forward.

Alex Scott

Analyst

Okay. Second one I have is on Brooke Re and I know there's a little bit of noise just around the hedging this quarter, but as we think through that structure, I think over time, you guys have said there is positive margin between the fees and the cost of hedging there on these riders, what point would you have the confidence to actually take a common dividend and have that help the overall cash flow of the company. And I appreciate you said it up recently, but I'm just sort of interested in the more medium and long term there.

Don Cummings

Analyst

Yes. So in terms of Brooke Re, as you pointed out, it's -- we've got 3 quarters now of experience operating with Brooke Re in place. And we do expect that over time, it will be capital generative. And if you look at just the results through the first 9 months, we have seen some growth in the equity there. We don't have any expectations here in the near term to take any capital out of Brooke Re. We think we've got sufficient capital generation occurring at JNL and continue to see that growing a bit and think that, that will be sufficient to fund our near-term capital return targets.

Operator

Operator

Our next question will be from the line of Suneet Kamath with Jefferies.

Suneet Kamath

Analyst

I just wanted to talk about the capital generation. Your comment that you're running over $1 billion year-to-date. But if we look at the holdco dividends, they're about half that level. And I know 2024 is a little bit of an odd year because of the whole setup of Brooke Re. But is your expectation that in a normal year over a 12-month period, you would send $1 billion to the holding company?

Don Cummings

Analyst

Yes. Thanks for that, Suneet. So obviously, 2024, as you highlighted, is a little unique. We didn't really have a distribution up to the holding company in the first quarter because we use some of that capital to fund the establishment of Brooke Re. And in terms of future capital generation, it will continue to depend on the performance of our business. So we would fully expect to continue with our approach of periodic distribution of capital. And as I said, it's going to depend on the level of performance that we have in terms of generating capital. So I don't want to give you a guide at this point. As you know, we typically publish our capital return targets in connection with our fourth quarter results. So as part of that, we'll be sharing what our plan is. If you look back at our track record since we've been a public company, I think you'll see a sort of consistent balanced approach in terms of growing the level of capital return that we have. I'm anticipating if the business continues to perform as expected, that we will see some increase in the level of our capital return for 2025.

Suneet Kamath

Analyst

Okay. Got it. And then I guess my other question was -- and I think you hit on this in your prepared remarks, but when you price and hold capital for RILA, are you holding capital sort of on a stand-alone basis? Or are you embedding that diversification benefit that you get with the traditional VA business?

Don Cummings

Analyst

Yes. No. When we're pricing, it's done on a stand-alone basis. So we don't take into account the offset that we get with the VA business. That does come through, as we've talked about on prior calls and our hedging results to the extent it allows us to do less -- lower levels of external hedging. We do get a benefit from that. But in terms of pricing, we don't take that into account. It's really done on a stand-alone basis.

Suneet Kamath

Analyst

Got it. And if I could just sneak one more in. One of your competitors earlier this year has talked about pretty sizable basis risk year-to-date, I guess, just given how skewed the S&T's performance has been from a handful of stocks. Are you seeing any of that in your results?

Don Cummings

Analyst

Yes. So basis risk for the quarter was fairly muted for us. And the first 2 quarters of the year, we did see a little bit of basis risk. It was kind of positive in 1 quarter, offset by negative result in the second, I believe. But on a year-to-date basis, it's been fairly modest. We do have a very rigorous approach in terms of managing the funds that are available on our platform. And I think that's one of the things that we use to help manage that. We also use a number of different indices in our hedging approach. So based on all of that, we haven't seen a significant impact from basis risk year-to-date.

Operator

Operator

[Operator Instructions] And our next question is from the line of Ryan Krueger with Keefe, Bruyette, & Woods.

Ryan Krueger

Analyst

First one was on for Brooke Re. Can you provide us a little more color on or at least quantification on how the capital has moved at Brooke Re on a year-to-date basis at this point?

Don Cummings

Analyst

Yes. So we obviously are not currently disclosing the exact financials of Brooke Re. I think, consistent with other companies that have captive arrangements. As I mentioned, we have seen some growth there. It's not a huge amount, but I don't really want to quantify it at this point. I would say that just as a reminder, we did put of $700 million in, in terms of the initial capitalization of Brooke Re. And the other kind of component of equity that exists there is the asset related to the MRB or the variable annuity guarantees. And the combined results of both of those have grown in the first 9 months.

Ryan Krueger

Analyst

Okay. Got it. And then when I look at the market risk benefits roll forward, it looks like there's been a fairly consistent amount of negative impact from actual policyholder behavior versus your expectation at $514 million year-to-date. Can you give some additional info on what is driving that? And how to think about that as we go forward?

Don Cummings

Analyst

Sure, Ryan. So what ends up in the sort of the unexpected component of the MRB roll forward is essentially related to lapse activity and withdrawals. And our lapse rate assumptions are set on a kind of a long-term view of what we expect to happen. And from quarter-to-quarter on a short-term basis, you can see some variability in that. But really, assumptions are set more on a long-term basis. And as you know, Jackson goes through a process of updating its actuarial assumptions in the fourth quarter. And I don't want to get ahead of that, but we will -- we will be doing that. We're actually going through the final phases of that now, and we'll be reporting that out along with our fourth quarter results.

Ryan Krueger

Analyst

Just one quick follow-up to that. Is this -- is what's happening currently mostly lower-than-expected lapse rate? Has that been the short-term deviation?

Don Cummings

Analyst

No, it's actually the other way around. As we've talked about when equity markets are really strong, like we've seen this year. We do tend to see a higher level of lapse rates or policyholders withdrawing their money. So it's higher lapse.

Operator

Operator

Our next question will be from the line of Tom Gallagher with Evercore ISI.

Thomas Gallagher

Analyst

A few questions. First, just on the hedging. The -- I guess, excluding the equity vol which you -- it's excluded for purposes of Brooke Re capital. It looks like you had about $130 million of hedging losses in the quarter. Just curious what caused the hedging losses, which factors? And how big of a loss when we think about hedging in Brooke Re? How big of a loss or how much of breakage would you need to see before there would be some capital implications? It sounds like you have a pretty big buffer there, but just want to get a broad sense for what that would look like.

Don Cummings

Analyst

Yes. So just in terms of the level of hedging losses and the math you did there with subtracting out the volatility. It sounds like you're on the right track. We don't view volatility as kind of a core risk embedded within our guarantees. And so rather than developing a fairly costly hedging approach to cover off volatility, that's what led us to setting the fixed volatility assumption within our modified GAAP approach at Brooke Re. And we do accept that, that's going to create a little bit of variability in the GAAP results that show up in our nonoperating results. So that's the point on volatility. And in terms of the level of losses that we would be able to sustain at Brooke Re prior to putting in any capital. If you go back to our original disclosures around the establishment of Brooke Re, we set it up intentionally to be sort of self-sustaining. And so we do feel like we have a pretty strong buffer there and well above the minimum operating capital that's required for a regulatory basis. We also have internal risk levels that we monitor quite regularly, and we feel good about that. And really feel like we're in a strong position in terms of Brooke Re. It would take a very significant market event cause a capital issue. I think as we've disclosed on prior calls, that would typically be very high levels of volatility combined with really significant equity stresses or equity and interest rate stresses combined. So think of events like the global financial crisis in the '07, '08 period or potentially similar to the COVID shock in 2020, would be the scenario where we could potentially need some additional capital for Brooke Re.

Thomas Gallagher

Analyst

That's helpful, Don. So as a bright line test with the $700 million of hard assets that you funded with initially, if that if you went through that, would that be one way to think about it? Because I know you have other equity, but the rest of the equity that's been created there which is essentially an embedded gain from the embedded derivatives doesn't really feel like real equity. I mean, I don't know if the regulator views it that way. But just curious like how you -- is that a reasonable initial level to think about if you depleted that $700 million, which obviously you're way away from that because you have year-to-date gains, but just trying to understand like a bright line level.

Don Cummings

Analyst

Yes. We don't have a bright line just related to the $700 million, recall that, that was our initial capital or hard assets, if you will, that we put into the company. Each order, we settle up on the results of the business with Brook Re. And so the hard assets have actually grown as well over the first 9 months of the year.

Thomas Gallagher

Analyst

Got you. And then just the...

Don Cummings

Analyst

Sorry, Tom, just to close that out, we don't really have a bright line. We do have with us metrics that we monitor which are kind of scenario based and we look at it very, very closely. But there's no bright line dollar amount that we guide you to.

Thomas Gallagher

Analyst

Got you. And then I just -- my follow-up is just on sales. The big ramp-up in fixed and FIA sales in Q3. I heard your comments about -- I think you said probably not going to stay at that level. But I guess my question is that's probably the most competitive part of the life insurance market. That's where all the alternative managers are operating. How do you think about stand-alone ROEs? Like I heard everything you said about diversification. That all makes sense. But I can't imagine these are particularly high return sales like RILA, in my view, probably a much better quality sale for you. So why like enter into that market in such a big way if that's, in fact, where most of the competition is intense in pricing, I don't know that's a bit of a rambling question, but what kind of returns do you think you're actually getting on those product sales?

Laura Prieskorn

Analyst

Good morning Tom, and thank you for that question. Yes, I'll have Scott addressed the drivers for the sales and then Don can address the return question. But year-to-date, we've seen very constructive characteristics for annuity sales overall across all different annuity types. And we've seen very rational behavior out of our peers as well. So across the entire industry, we're seeing growth in markets for each annuity type. And Scott can share our view on what's driving those increased sales.

Scott Jackson

Analyst

Yes. Thanks, Laura, and thanks for the question, Tom. I mean there's similar drop, it starts with demand. I mean you've heard virtually every firm in our industry talk about favorable demographics. And the reason why is because that opportunity is real. It's not just the number of Americans turning 65 to have the need, but the number of Americans that now are responsible for funding their own retirement and the need for protection, for growth, for lifetime income is stronger than ever. It's also another driver is the number of solutions that are available as Laura pointed out, it really highlights the importance of having product solutions that are available that have strong consumer value across the entire risk spectrum, whether it's the growth potential of VA, the protected growth of RILA or the principal guarantee of spread that's important to -- overall to Jackson sales and diversification. Another driver is really the number of advisers that are now using annuity solutions as part of their client diversification and part of their overall financial planning. I mean we've spent a lot of effort over the years to ensure that our products are integrated in the wealth management platforms and then the financial planning tools that advisers use to run their business and to serve their clients. And it's really helped advisers illustrate the positive impact our solutions can have on a client's portfolio, it really helps demonstrate how we can drive potentially better outcomes. From a spread specific standpoint, we talked about some of the drivers, active repricing, capital stability of Brooke Re, our ability to tap into the strength of distribution and reengage with key distribution partners. But for Jackson, a key reason to be in the spread business is it helps us attract new advisers to our overall suite of products. Much like RILA did, what we've seen with the spread sales, it's brought advisers back to Jackson that hadn't done business with us in a while. So we're very pleased with the results we've seen with our diversified sales.

Don Cummings

Analyst

Yes, Tom and a couple -- I'll just add a couple of things to that and then address your question on returns. So as you know, Jackson's had a pretty long history of being in the spread business. And so as Scott was mentioning now that we have more stability with Brooke Re in place in terms of our capital position. We made the decision to support the distribution effort. In terms of returns, we're very comfortable with the profitability of all the products that we're currently selling including the fixed annuities. And the range of returns really varies by product. So as you pointed out, our VAs is some of our highest return products, fixed annuities are going to be at the lower end of the range and RILA somewhere in the middle there. We don't disclose specific IRR targets, but we're comfortable with the returns we're seeing on that business.

Operator

Operator

With no further questions on the line. I will now hand the call back over to Jackson's CEO, Laura Prieskorn, for any closing remarks.

Laura Prieskorn

Analyst

Thank you all for joining us this morning, and we look forward to providing you our next update on our full year results in the new year. Take care.

Operator

Operator

This will conclude the Jackson Financial Inc. 3Q '24 Earnings Call. Thank you to everyone who is able to join us. You may now disconnect your lines.